Friday, 7 February 2014

Christine Lagarde campaigns for Keynes

In the high and far-off times, when there was an interesting talk on the wireless it was possible to read it in print in The Listener the following  Friday.  In this era of super-communications I'm not sure that a similar facility is still available but Christine Lagarde's brilliant Dimbleby Lecture, broadcast on BBC1 Television last Monday, can still be seen via iPlayer at least until next Monday.  It is not to be missed.

It may just have  been Gallic tact which caused Mme Lagarde to praise Keynes to the skies, illustrate the development of communications by comparing the reporting of the Queen's coronation by one voice to the multitudinous tweeting of  the birth of Prince George, and even manage to mention Downton Abbey to her British audience, but her call to "rekindle the spirit of Bretton Woods" suffused the entire lecture.

Three special vignettes:

  •  We need a financial system which serves production rather than its own purposes.
  •  Inequality can tear down the fabric which holds society together [so] inclusion should be given equal weight with growth.
  • Fair taxation requires political courage.
This is a political speech inspired by vision: a refreshing change from the short-sighted petty squabbling which presently passes for politics in the UK.

As an afterthought, although she didn't actually say that Gordon Brown saved the World, she did have some very complimentary words to say about the London G20 Summit which he lead,  something coalition spokespersons might bear in mind when they continue to mislead us by claiming that they're "clearing up the mess left by Labour."

As a campaigner for justice for the Third World for over half a century I never thought I'd say this, but, in Mme Lagarde's case : Vive le FMI!


  1. Christine Lagarde has also called for austerity economics. Debt Reduction , lower public spending etc. There's not much that Keynesian about current IMF policies regarding the Eurozone.

    Keynesians need to explain the reasons why the Euro works well in Germany which is a net exporter but doesn't work well for net importers like the UK.

    The government deficit in the UK, which would be entirely contray to EU rules, is part of the money go round cycle. As money leaves the country to pay for imports it is replenished by deficit spending. The government sells Treasury securities to our suppliers and recycles them back into the economy.

    The cycle is in the opposite direction in Germany and so there's no problem of breaking EU rules for them.

    The Euro would have been a disaster for the UK. So are plans for Govts to 'achieve' surpluses incidentally. Its up to Keynesians to try to better explain that to a a public who don't get much else besides neo-liberalism from their politicians.

  2. Should be "entirely contrary to EURO rules"

  3. Thanks for your comment, petermartin. I've looked at your blog and am impressed by your ability to explain complex economic concepts in a simple manner.

    As I hint in the post I have been a "Justice for the Third World" campaigner for much of my adult life and in that period the IMF, which has consistently forced austerity programmes on to societies which are already desperately poor, has been public enemy number one. However, it's beginning to learn, though not necessarily, as you point out, with respect to the struggling Southern European countries.

    What I liked about Lagarde's speech was its positive internationalist tone, and in particular the three points I highlighted: a banking system that works for production rather than itself; the dangers of inequality; and the necessity for political courage to implement fair taxation. The vision and courage for all three of these are sadly lacking in Britain at the moment.

    On a more technical point, you are quite right to point out in your own blog that countries with a balance of payments surplus (eg Germany) also tend to have a surplus on government internal expenditure. The former is an injection and the later a withdrawal so they balance each other out.

    Here in Britain we have deficits on both so the economy is on a downward spiral unless these two withdrawals are balanced by an injection from private investments, which they wont be if there's a lack of demand . Given that our total government Debt:GDP ratio is still at a respectable level the sensible thing to do is for the government to "prime the pump" by infrastructure spending and so stimulate growth, increasing tax receipts, reducing social security expenditure and thus reducing the internal deficit.

    Reducing the external deficit is a bigger problem which receives far to little attention.

  4. Hi Peter, Thanks for your comments. I have to reduce explanations down to a certain level of simplicity otherwise I don't understand them myself!

    I agree that there was much that was commendable about Christine Lagarde's speech. It is possible its a sign that she, and possibly the IMF, are shifting their position but we shouldn't infer too much from a single speech.

    I don't agree that the UK economy is in a downward spiral. There aren't two withdrawals. There's the withdrawal of import payments. This is replenished by a government deficit. If the two are equal the funds of private sector stay the same. If the government deficit is larger the private sector get richer which stimulates the economy but could be inflationary if overdone. If the government deficit is smaller the private sector become poorer and recession is the danger.

    Neither would I agree the external deficit is any real problem. This has to be financed by the sale of Treasury securities but there seems to be enough buyers. If there were fewer buyers the pound would depreciate. Imports would fall relative to exports and there would be less need to sell securities.

    The UK, the USA too, get almost a free ride from the sale of these securites. Their governments would be crazy to force either the trade accounts or budget accounts to balance in the way both major UK parties seem to be advocating for the UK.

    1. Oops! Oh dear, oh dear, oh dear. I have clearly been retired too long.
      You are absolutely correct in saying that the government’s internal deficit is an injection, not a withdrawal. Hence it does, as you say, counteract the internal effects of the leakage caused by the balance of (external) payments deficit. However, I would like to see the internal deficit used on developing our infrastructure, thus creating employment now and strengthening our future economic capabilities, rather than being squandered on social security payments.
      I also confess that a “downward spiral” is perhaps something of an overstatement. The UK economy did go into recession after the 2007/8 crash, began to recover after Darling’s stimulus (the cut in VAT? ) in 2010, went into recession or flatllined as a result of Osborne’s first budget, and is now in recovery again , probably as a result of the not much talked about increase in public expenditure in 2012, along with the effects of the automatic stabilisers and increases in consumer expenditure largely financed by further borrowing. Whether this is sustainable or not remains to be seen. The Governor of the Bank seems to have his doubts, as so do I, albeit at a less well informed level.
      I’m not quite as sanguine as you on the external deficit. Financing this by overseas sales of Treasury securities is a short-run expedient which really does place a burden on future generations. Whereas borrowing internally just involves a reshuffling of future income within the economy, external borrowing has to be repaid to other economies, thus genuinely placing a cost on our children and grandchildren.
      Similarly financing the external deficit by encouraging inward investment transfers the ownership of our assets to foreigners who may not share our priorities, and also ensures a flow of profits, interest and dividends out of the economy, thus making the achievement of balanced external payments more difficult in the future.
      We really need to earn, indeed more than earn, our current living by achieving a surplus on the current balance of payments now. This is what Osborne hoped for in an “export led recovery” and so far it hasn’t happened.

    2. Hi peter,

      Yes I think we are nearly in agreement. "Squandered on social security payments' can be interpreted different ways. I would I agree if you are saying, which I think you are, that its waste of resources to have so many potential workers unemployed and underemployed in the economy. Industry is working well below capacity which is another, not unrelated, waste and so those should be the biggest priority. IMO

      I do think its likely a mini housing boom is more likely to be the major cause of any recent economic improvement. I expect the Tories will hope it lasts until after the 2015 election. When house prices peak the banks will stop lending again, there'll be the inevitable bust but by then it will be someone else's problem if they lose the election. We'll see.

      External deficits and the intergenerational burden? I think I'll have to expand on this on one of my own postings but there's obvious contradictions in mainstream thought. Mainstream thought has it pretty much as you've described it. Exports are virtuous. Imports indulgent. The German economy is virtuous - they have a surplus of 7%. Britain is indulgent with its deficit of 3.5%.

      Our children and grandchildren are going to have to repay our debts! OK maybe. All this means is that the UK economy of some future time will possibly have to have a surplus of 3.5% to pay for our deficit of 3.5%. Their economy will be more like the present day German one except not quite so export dependent.

      Wouldn't this a virtuous state of affairs according to our present mainstream economic thinking?

      An alternative way of thinking would be to say that every generation consumes the goods and services which are produced in the economies of their time. They can't send anything back in time to us and we can't leave them much that will be directly useful to them except whatever it takes to ensure their future economy is in as good a shape as possible.

      Whether their economy has a surplus of 3.5% or a deficit of 3.5% is neither here nor there by comparison.

    3. I'm pleased we're "nearly in agreement." Again, you're quite right: ". . .squandered on social security payments" is open to misinterpretation. I am firmly convinced that generous social security payments should be made to people who for whatever reason cannot support themselves. In my view the adoption of the Green Party's policy of a Citizens' Income would take a lot of the heat out of the debate. If everybody gets it then no-one really has any grounds for complaint if some people choose to live at the minimum standard for which it provides rather than earn more to reach a higher standard.

      In the past the Greens have argued that a "minimum standard" Citizens' Income is viable if everyone who decides to supplement it by work (ie nearly everybody of working age) pays taxes on all their earnings. In other words, personal allowances etc on the first part of earnings are abolished. I once wrote to the Greens for evidence to support this but received no reply.

      Social security payments are squandered in that they provide no long term benefits to the economy. A classic example is Mrs Thatcher's use of profits from North Sea Oil to fund a huge rise in unemployment rather than re-equip the economy without, for the first time in post-war history, risking a balance of payments crisis.

      It is true that " every generation consumes the goods and services which are produced in the economies of their time" and for internal debt there is no sense of one generation passing on debts to the next (though it is widely believed that they do and politicians of all parties peddle the myth.) However if there is a balance of payments deficit on current account today's generation in one economy (eg Britain) is consuming more than it produces, and a future generation will have to pay it back to the rest of the world. Conversely if a country has a surplus on current account (eg China) today's generation is consuming less than it produces, effectively "giving away" part of its production, and future generations in that economy will reap the benefit when the rest of the world pays it back.